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Municipal bonds aren’t bulletproof, but they’re one of the safest investments available.

They preserve capital while generating interest. They provide tax benefits, they help build local infrastructure, they’re liquid, and they have low default rates.

Municipal bonds come in two types. General obligation bonds repay their holders through taxes. They often have low interest rates, but they’re safe.

Revenue bonds generate money through ticket sales, bills, tolls, and similar means. They help build infrastructure.

Most municipal bonds are exempt from federal taxes, unlike corporate bonds, and many are exempt from local taxes, as well. While most municipal bonds offer a lower interest rate than a corporate bond, the tax impact frequently makes them more profitable.

Some investors use municipal bond ETFs for diversification. Most are well balanced, and protect investors even if some of their bonds were to default. But municipal bond ETFs can suffer large losses, unlike an individual bond that returns the lender’s money with interest at maturity.

While predictions for the demise of the municipal bond market have come from financial gurus like Warren Buffet and Meredith Whitney, those forecasts have yet to come true.

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